Trade Policy and Structural Change

We study how tariffs affect industrial structure and welfare in an economy where sectors are complements and preferences are nonhomothetic---two drivers of structural change. Tariffs reshape sectoral composition through relative prices, income effects, and sectoral net exports. We characterize these mechanisms analytically and quantify them in a dynamic multi-country model with capital accumulation and input-output linkages. A counterfactual 20-percentage-point increase in U.S. manufacturing tariffs raises the manufacturing value-added share by about one percentage point and increases U.S. welfare by 0.43 percent, while lowering welfare abroad; retaliation would make all countries worse off. The optimal unilateral U.S. manufacturing tariff is 20.9 percent. Comparing different preference specifications, we show that homothetic preferences without income effects overstate the U.S. welfare gains from unilateral tariff increases.